DEVELOPMENT BANKING FINANCE

FOR THE CORPORATE

SECTORUNIT III/1UNIT III/1

IntroductionIntroduction

A Development Bank can be defined:A Development Bank can be defined:

““A Development bank is that bank A Development bank is that bank which gives priority to development which gives priority to development objectives”objectives”

William DiamondWilliam Diamond

It differs from the commercial banks It differs from the commercial banks in the following ways:in the following ways:

They do not seek or accept depositsThey do not seek or accept deposits They provide long term and medium They provide long term and medium

term financeterm finance They provide development servicesThey provide development services

ObjectivesObjectives To serve as an agent of development in To serve as an agent of development in

various sectors, viz., industry, various sectors, viz., industry, agriculture and international trade.agriculture and international trade.

To accelerate the growth of economyTo accelerate the growth of economy Rapid industrialization, particularly in Rapid industrialization, particularly in

the private sector so as to provide the private sector so as to provide additional employment opportunities as additional employment opportunities as well as the higher production.well as the higher production.

Development of Entrepreneurial skill.Development of Entrepreneurial skill. To take up rural developmentTo take up rural development

To finance projects which are of great To finance projects which are of great importance to the economy.importance to the economy.

to finance the banking and small scale to finance the banking and small scale industriesindustries

To finance the banking and small scale To finance the banking and small scale industries.industries.

Providing the technical, and Providing the technical, and administrative assistance.administrative assistance.

Undertaking marketing, and investment Undertaking marketing, and investment research and surveys.research and surveys.

CharacteristicsCharacteristics

A development bank is a multi-A development bank is a multi-purpose financial institutionpurpose financial institution

it strives to promote economic it strives to promote economic developmentdevelopment

it provides refinance to other it provides refinance to other financial institutionsfinancial institutions

A development bank provides a A development bank provides a package of services from package of services from identification to management identification to management

A development bank arranges for A development bank arranges for package of incentives to package of incentives to entrepreneurs.entrepreneurs.

it brings in institutional innovations it brings in institutional innovations related to developmentrelated to development

a development bank is a visionary a development bank is a visionary institution. It is not concerned only institution. It is not concerned only with the past or the present but also with the past or the present but also takes into consideration the futuretakes into consideration the future

A development bank is a link that A development bank is a link that spurt all round developmentspurt all round development

Need Need Necessity of medium and long term capitalNecessity of medium and long term capital To channelise savingsTo channelise savings Industrial FinanceIndustrial Finance Modernization of Small Scale IndustriesModernization of Small Scale Industries Transformation of AgricultureTransformation of Agriculture Trade oriented GrowthTrade oriented Growth Underdeveloped Capital MarketUnderdeveloped Capital Market Regional ImbalancesRegional Imbalances PrivatizationPrivatization GlobalizationGlobalization

Different Different Development Development

BanksBanks

Industrial Finance Industrial Finance Corporation of India Corporation of India

LimitedLimited Establishment:Establishment: July 1, 1948 July 1, 1948 Objective:Objective: to give short term and to give short term and

medium term loans to industrial medium term loans to industrial concerns.concerns.

State Financial State Financial CorporationCorporation

Establishment:Establishment: State Finance corporation State Finance corporation Act was passed in 1951. at present there Act was passed in 1951. at present there are 26 such corporations.are 26 such corporations.

Objectives:Objectives: To provide long period loans to To provide long period loans to small and medium sized industries at state small and medium sized industries at state level.level.

Functions:Functions: Loan extended up to 20 years. Loan extended up to 20 years. Also provide loan to the service industry. Also provide loan to the service industry. Advance upto 20% of the total loans to the Advance upto 20% of the total loans to the individual industrial units.individual industrial units.

Industrial Development Industrial Development Bank of IndiaBank of India

Establishment:Establishment: July 1, 1964.July 1, 1964. Objectives:Objectives:

Planning, promoting and developing Planning, promoting and developing industries to fill the vital gaps in industrial industries to fill the vital gaps in industrial structure;structure;

Providing technical and administrative Providing technical and administrative assistance;assistance;

Undertaking market, and investment Undertaking market, and investment research & survey.research & survey.

Acts as an apex institution for term finance Acts as an apex institution for term finance for the industry.for the industry.

Lender of the last resort and financing Lender of the last resort and financing projects that are of national priority.projects that are of national priority.

Small Industries Small Industries Development Bank of IndiaDevelopment Bank of India

Establishment:Establishment: 1989, started 1989, started functioning in 1990.functioning in 1990.

Objectives:Objectives: Acts as an apex institution for term finance, Acts as an apex institution for term finance,

refinance for the small scale industries.refinance for the small scale industries. To serve as the principal financial institution To serve as the principal financial institution

for promotion, financing and development of for promotion, financing and development of the small scale and ancillary industries.the small scale and ancillary industries.

To co-ordinate the functions of the To co-ordinate the functions of the institutions engaged in promoting, financing institutions engaged in promoting, financing and/or developing the small scale sector.and/or developing the small scale sector.

Industrial Investment Bank Industrial Investment Bank of India Ltd.of India Ltd.

Establishment:Establishment: earlier known as earlier known as Industrial Reconstruction Bank of Industrial Reconstruction Bank of India. It turned into a full fledged all India. It turned into a full fledged all purpose development bank in 1997.purpose development bank in 1997.

ObjectiveObjective:: To give financial assistance for the To give financial assistance for the

reconstruction of sick or closed industrial reconstruction of sick or closed industrial units.units.

It offers technical as well as managerial It offers technical as well as managerial facilities also.facilities also.

National Housing BankNational Housing Bank

EstablishmentEstablishment: July 1988: July 1988 Objectives:Objectives:

To promote construction of new housesTo promote construction of new houses To advance loans for extension and To advance loans for extension and

renovation of old houses.renovation of old houses. To finance development of slum areasTo finance development of slum areas To refinance the loan given to the poor To refinance the loan given to the poor

and weaker sections of the society.and weaker sections of the society.

Industrial Credit and Industrial Credit and Investment Corporation of Investment Corporation of

IndiaIndia EstablishmentEstablishment: 1955, set up with an : 1955, set up with an

initiative of World Bank. It was mainly initiative of World Bank. It was mainly regarded as an investment institution.regarded as an investment institution.

Objective:Objective: Providing assistance in the creation, Providing assistance in the creation,

expansion and modernization of the expansion and modernization of the industrial enterprises;industrial enterprises;

Encouraging and motivating participation Encouraging and motivating participation of private capital;of private capital;

Encouraging and promoting industrial Encouraging and promoting industrial investment.investment.

National Bank for National Bank for Agriculture and Rural Agriculture and Rural

Development.Development. EstablishmentEstablishment: July, 1982: July, 1982 ObjectiveObjective::

planning;, promoting and operational planning;, promoting and operational matters relating to agriculture and rural matters relating to agriculture and rural development;development;

Training, research and consultancy relating Training, research and consultancy relating to agriculture and rural development;to agriculture and rural development;

Coordinating with other institutions Coordinating with other institutions engaged in similar work;engaged in similar work;

Acting as a lender of the last resortActing as a lender of the last resort

LimitationsLimitations Loans to established Entrepreneurs;Loans to established Entrepreneurs; Contribute towards concentration of Contribute towards concentration of

economic power.economic power. Less interest in Under-writingLess interest in Under-writing Ignores the Small scale industries, as they Ignores the Small scale industries, as they

lack proper security to offer for the loans.lack proper security to offer for the loans. The capital resources of these Institutions is The capital resources of these Institutions is

limited limited lack of funds for development. lack of funds for development. Unbalanced regional grants.Unbalanced regional grants. Ignores the problem of Industrial SicknessIgnores the problem of Industrial Sickness

Recommendations of Recommendations of Narasimham Committee on Narasimham Committee on

Development Banks:Development Banks: Ownership pattern should be broad based.Ownership pattern should be broad based. Should be allowed more autonomy in their working.Should be allowed more autonomy in their working. Only competent persons should be appointed.Only competent persons should be appointed. Representatives of the industrial sector should be Representatives of the industrial sector should be

included in the boards of development banks.included in the boards of development banks. SFC should be made autonomous.SFC should be made autonomous. Should borrow from capital market at market rates.Should borrow from capital market at market rates. Should have the sole responsibility in loan sanctions.Should have the sole responsibility in loan sanctions. In case of corporate take overs, development banks In case of corporate take overs, development banks

should generally lend support to existing management should generally lend support to existing management with proven record beneficial to all concerned.with proven record beneficial to all concerned.